HEDGEDUCATION - FAQ

No. Not all hedge funds are hedged. Many are simply long stocks, and may even use leverage. One must ascertain on a case by case basis, therefore, whether a fund hedges, how, and how much. This is absolutely crucial to understanding a fund's performance. Without this information, one cannot gauge how much risk produced its return.

No. This is the greatest misconception regarding hedge funds. Although some funds are aggressive, many other funds emphasize consistency of returns or protection of investors' capital. Recall that hedge funds cover a wide variety of investment strategies including fixed annuities and other conservative strategies.

"Hedging" roughly means managing risk. Typically, a money manager employs a particular hedging technique in order to mitigate a particular type of risk. For instance, market risk - the risk of a decline in the overall market - can be hedged against by selling a broad collection of securities short in equal proportion to one's long exposure. The same end could also be accomplished by buying put options on an index like the S&P500. Other types of risk often hedged against include interest rate, inflation, and large weightings in a sector, region, single company, or currency. Tools and techniques of hedging include: raising cash, selling short, buying or selling options, futures, commodity and/or currency futures, etc.

Hedge funds are defined by their structure rather than any specific investment method. These pooled investment vehicles are commonly set up as limited partnerships in which the manager acts as the general partner while the investors act as the limited partners. Oddly, the term â€˜hedge fundâ€™ is a misnomer. Not all hedge funds are hedged. Hedge funds invest in any number of strategies regardless of the common term that attempts to corral them. These strategies include investing in asset classes such as stocks, bonds, commodities, currencies, and return enhancing tools such as leverage, derivatives, and arbitrage. Some funds, however, are simply 100% long equity securities.